Why Mutual Funds Aren't Keen On Tying Up With Execution-Only Platforms

Mutual fund houses are not keen on signing agreements with newly formed execution-only platforms. Why not? Because it comes with an increased cost.

Securities and Exchange Board of India's regulatory framework for EOPs was released last year and came into effect in December. These platforms will only be involved in direct selling of plans without offering any advice by charging a flat fee. But such direct-selling platforms are still waiting for formal pacts with asset managers.

Fund houses have not been taking the discussions seriously at the moment, according to industry people with knowledge of the matter, who spoke on the condition of anonymity. It leads to AMCs incurring higher costs without changing the expense ratio, and most importantly, paying for something that they have been getting done for free, the persons quoted above said.

The flat fee will lead to adjusting for other distributors, and since this has to be paid from the AMC targets, it will stretch them further, according to a top industry executive who didn't want to be identified. Fund houses will need to see value creation from the current EOP 1 model, the executive said.

While the concept of EOPs does not impact investors as much, the framework focuses on platforms and lets them earn money for the transactions they facilitate, which they have been doing so far for free.

SEBI has defined two categories—EOP 1 and EOP 2. The first allows platforms to levy a flat fee of Rs 2–2.5 per transaction from the AMC. EOP 2 categories can operate only through platforms provided by stock exchanges and can charge customers as they work as an agent of investors.

About eight platforms—including MF Utilities, ETMoney, and Smallcase—are registered with the Association of Mutual Funds of India under the EOP 1 licence, according to AMFI data. However, there have been no takers as of now for the EOP 2 category.

“The agreement with asset management companies is in the process," said Ganesh Ram, managing director and chief executive officer at MF Utilities. "Since 2015, MFU has module for direct investors to transact and more than a million investors have been using the platform. The transition has happened, though, we only have to make changes in the system as per the SEBI circular and AMFI guidelines."

Traditionally, mutual fund offerings were distributed via mutual fund distributors, platforms and brokers. Registered investment advisers, who offer only direct plans and get into an advisory agreement with the client, have also become popular in the last few years.

However, there are players who want to offer transactions only and not necessarily acquire an advisory or broking licence. And the EOP 1 category helps with that.

“We didn't want to offer regular plans. So, MFD was out of the question. We don’t provide advice as a platform and are partnered with registered investment advisors, who create these small portfolios of baskets. We'd rather want to just be an execution platform and this EOP works for us to soon start offering mutual funds on our platform,” said Vasanth Kamath, founder and chief executive officer of Smallcase.

With a registered investment advisor licence, ET Money has users who opt to avail advice (through a paid feature), while others skip it. It is also a registered platform for EOP and is waiting for AMCs to sign the agreement, after which it will commence the feature.

“Nothing major changes for us with this. The transactions in non-advised (segment) would get moved under EOP and not come under the RIA. This change will be more procedural in nature for ET Money and would not impact operationally or economically for the end investors,” said Santosh Navlani, chief operating officer at ET Money.

Fintechs already in the business can extend the offering. However, experts do not foresee new players entering to just provide EOPs.

According to experts, in the short term EOP model may not find many takers as it depends on when the fund houses come forward, how well it gets executed, and at what magnitude.